It has now been three days since demonetization was announced. The initial euphoria among the middle class as well as honest tax payers has given way to some sort of misgivings due to the slow process of currency change and new currency availability. Many people who do not understand economics also are spreading issues like the fact that new high denomination notes are going to be introduced again.
All of us should be very clear that any honest taxpayers should continue to be very happy at this step of the government. There are several reasons for this. Tell me try to give a simple explanation of the same-
- Demonetization will involve the process where the entire cash that is outside the banking sector coming back into the banks. Now, there will be a lot of undisclosed benami money and money lying with corrupt politicians and officials that will not come back into the system i.e. that money will be permanently eliminated. After putting the money into their bank accounts everyone who has legitimate money can either keep the money in the bank or take out the cash in the form of new currency. As such there will be no change for them.
- There will be large number of people who understate their income. As such there will suddenly be a surge in incomes of many people this year as the money that goes into the accounts will need to be shown as income if it was not cash in hand earlier. This will increase the tax base substantially and once these people are into the formal economy it will be tough for them to again go back earning and spending in black as at the starting point of the new currency cycle the black money will be almost totally be eliminated. Now when people say that once new notes come out then the black economy will start again. Yes, there is no doubt that many will not change their ways of operation. However the onus is on all of us. The entire money now is declared, white money in the banks. As such what incentive does anyone have to convert their white into black to pay those who want to continue under declaring their incomes. We should refuse to do that and insist on proper receipts from here on so that these people pay proper taxes.
- Leaving aside what is in Gold or what has already been deployed in property etc the entire economy will start of as a formal economy i.e. a rebooted economy now. This combined with the introduction of GST and the digital connected age can potentially totally eliminate the scope of tax avoidance and generating black money in the future. In any case once the cycle is broken any significant black money generation will require atleast 10-15 years if not more. Transactions, spending patterns etc can be easily tracked with connected networks, intelligent systems now. Once you are in the formal system it will be difficult to move out.
- Government’s tax revenues will increase substantially; more people will be forced to pay taxes etc. As such the scope of much lower personal tax rates going forward becomes a realistic possibility. Peak rates of income tax will fall and directly benefit all of us. A much greater formal economy will increase the size of the reported economy and make the organized full taxpaying sectors and companies even stronger. All land and property transactions will move to a more or less white payment mode going forward. This along with GST will reduce corruption in the economy substantially.
- The drug and terrorism networks will take a huge hit and their funding could be impacted for a long time and give the government enough time to resolve these issues at a fundamental level.
Overall demonetization at this point of time has much greater benefits than disadvantages. The smoothness with which the RBI, Government and Banks handle the transition will determine the level of acceptability this measure continues to have among citizens. Hopefully the much dreaded Income Tax department which pulls up returns for scrutiny on credit card spends being over a particular threshold rather than targeting those who do not declare income will not harass people next year and this will also be very important from the Governments public perspective.
Overall it’s time to be positive as property, land etc will be much cheaper. Inflation will be much lower. Taxes should fall and interest rates remain low for longer going forward.